Bitcoin’s Wild Ride: A Look at Price Volatility and Two Key Factors You Need to Know

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Bitcoin (BTC-USD) is still the most popular cryptocurrency in the world, with a market cap of over $550 billion. Since its inception in 2009, it has gone through several significant events that have shaped its price and value. It is fair to say that institutional investors have become increasingly interested in Bitcoin in recent years and have expressed their views publicly.

Regardless of your views, I intend to build on my previous work and answer the following question: How can I develop a sustainable momentum trading strategy for Bitcoin that beats buying and selling? conservation ? Following my last article which explained how using a 23-day moving average strategy can beat the returns of buy-and-hold investors for Bitcoin, I had several requests to extend the analysis.

One of the most important of these events is the halving, which occurs roughly every four years. In this article, we’ll explain what the halving is and why it’s important for investors to consider it. An eagle-eyed reader suggested we should be optimistic as we are about a year away from the halving, so I set out to do a bit of research and test this strategy.

We’re going to focus on understanding what it is, why it’s relevant, and then testing to see if we can improve the 23-day moving average strategy taking into account the halving.

Bitcoin Halving – April 2024

According to Binance, “The halving is a pre-programmed event that occurs in the Bitcoin network every 210,000 blocks, or approximately every four years. It’s called the halving because it halves the production rate of new bitcoins. Specifically, the reward for bitcoin miners who successfully add a new block to the blockchain was reduced from 12.5 BTC to 6.25 BTC in May 2020.”

When the next halving takes place in Bitcoin in April 2024, the mining rate will drop from 6.25 BTC per block to 3.125 BTC per block.

The halving is a significant event because it reduces the rate at which new Bitcoins come into circulation. This reduction in supply should increase the price of Bitcoin over time, assuming demand remains constant or increases.

The halving is important for several reasons. First, it reduces the rate of production of new Bitcoins, which helps control inflation and introduces scarcity of supply. Bitcoin has a fixed supply of 21 million coins, and the halving ensures that this supply is released into circulation at a steady and predictable rate. By reducing the supply of new coins, the halving can help increase the scarcity and value of Bitcoin over time.

Second, the halving is an important event for Bitcoin miners. Bitcoin mining is a process where powerful computers compete to solve complex mathematical problems and add new blocks to the blockchain. Miners are rewarded with new Bitcoins for their efforts, and the halving cuts that reward in half. This means that miners will have to work twice as hard to earn the same amount of Bitcoins as before the halving.

The halving and the impact on the BTC-USD price

The key to answering this question is to carefully examine Bitcoin’s nominal and logarithmic returns since its inception. Look at this table:

(David Houston)

There’s a lot to take in here. This is Bitcoin’s log-10 return between 2010 and 2023 year to date. Logarithmic scales help us adjust the price on a clear chart. Think of it as the helicopter version of price that allows you to follow the long-term trend since 2009.

The orange line is the 23-day moving average. Previous Halvings are marked on the chart as 2012, 2016 and 2020. I have also taken the liberty of adding what I call “Midterms”. This is the halfway point between Halvings, and it’s relevant for reasons you’ll see shortly.

After Halvings, Bitcoin has historically seen significant price increases in the months and years that followed. For example, the first halving in 2012 was followed by a price increase of $12 to highs of $1,038 over the following 18-24 months. The second halving in 2016 was followed by a price increase from $650 to $19,221 over the next 18 months. Although past performance does not guarantee future results, the Halving is a significant event that has historically impacted the price of Bitcoin. The returns on the chart above underestimate the magnitude of the moves, which is significant.

It turns out that the opposite of the original theory is true: Bitcoin falls or trades sideways halfway between the Halvings until the Halving date. The lack of supply and perhaps the emotional response from buyers then propels the asset higher, halfway to the next halving.

23-day moving average system with halving feature

Remember that our system from the previous article relies on being able to trade the 23-day moving average. The system uses the following rules:

Sell ​​when BTC-USD crosses below its 23-day moving average of its price. Buy when BTC-USD breaks above its 23-day moving average of its price.

This has proven to be an effective strategy for reducing drawdowns and improving risk-adjusted returns compared to buying and holding Bitcoin.

How does it work ? Take a look at the following table:

david huston

The moving average strategy absolutely outperforms the buy-and-hold. Between 2010 and 2023 YTD, you would end up with a return of $64,341,549.24 versus $28,392.40 for BTC-USD the weekend this was written.

Already, this system significantly improves the return compared to the standard asset held since 2009.

What if we added a rule that was only long for 18 months after the halving, to try to capture more of the upside? Here’s what it looks like:

david huston

This doesn’t seem to add much to risk-adjusted returns. If you look at the gray line, it is significantly underperforming the 23-day moving average system, which is represented by the orange line.

What if we try another strategy: let’s say we sell BTC-USD and hold cash for about a year before the halving and see if we can avoid some of the decline:

david huston

This works better than trying to go long only after the halving. The system – represented by the gray line – works better than the buy and hold but worse than the 23-day moving average system. However, he still fails to outdo himself.

weekend effect

Not everyone can trade over the weekend, and so someone asked me if Bitcoin made a major move over the weekend, and you’re not able to act on the 23 moving average days until the markets open the following Monday?

If you were using the ProShares Short Bitcoin Strategy ETF (BITI) or the ProShares Bitcoin Strategy ETF (BITO) to trade this strategy, then this would definitely be the case.

Back-testing suggests that you can capture 85% of the returns from this strategy even when you factor in weekends and “realistic trade fills” that reduce performance.

Current situation

Since this was written, Bitcoin has fallen below the 23-day moving average and those who have shorted BTC-USD or entered a short Bitcoin ETF have profited from this decision. Take a look at the table below:

Stock charts

Bitcoin fell below 23-DMA on April 19 and again on April 30. The April 19 short position would have been taken out roughly flat (no profit). The most recent trade – which has been short since April 30 – is currently up 8.1%.

It is better to be methodical and patient. If you look at this and think to yourself, “Well, I’m going to jump straight in and short Bitcoin”, you are wrong. Wait for the next signal, which is when Bitcoin returns to the 23-day moving average. The only exception to this would be occasions like May 3 where it bounced off the average and stayed lower – we can add to their trade there.

If that sounds too simplistic, just imagine, what’s the catch? The catch is that you need patience and discipline to follow a system regardless of the outcome, and the psychology behind this is hard to develop.

Conclusions and final analysis

The nature of investing is such that we try to be smart and outsmart other investors, but this can lead to following theories that don’t work. In this case, the simple – yet powerful – 23-day moving average for Bitcoin is hard to beat. If you look closely at daily Bitcoin returns, they represent a very clear momentum-based pattern. This means that when Bitcoin goes up, it tends to keep going up for long periods of time. And when it descends, although it has peaks and troughs, it tends to continue in this trajectory for long periods of time. A moving average strategy allows you to capture these trends and follow the majority of them, while ensuring you have the discipline to cut your losses when the trend changes.

We may be of the opinion that the Halving has a strong impact on the price, and therefore, one should go Long Bitcoin. However, our analysis suggests that it is difficult to find a strategy that beats a purer Momentum trading strategy like the 23-day moving average.

Investors should consider going long on Bitcoin after the next halving in April 2024, and somewhat cautious into next year, as we expect Bitcoin to be volatile heading into the next halving. halving date.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these actions.

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